Does the Fee Imposed by Section 9010 of the Affordable Care Act Apply to Stop-Loss Coverage?

It was the intent of Congress in enacting the Patient Protection and Affordable Care Act to regulate health insurance comprehensively. Most of the regulatory provisions of Title I (the insurance reforms) apply to “A group health plan and a health insurance issuer offering group or individual health insurance coverage.” The definitions of these terms are drawn from the definitional section of the Public Health Services Act (added by the Health Insurance Portability and Accountability Act), which defines a “group health plan” as an ERISA plan, and a “health insurance issuer” as “an insurance company, insurance service, or insurance organization (including a health maintenance organization, as defined in paragraph (3)) which is licensed to engage in the business of insurance in a State and which is subject to State law which regulates insurance.” 42 U.S.C. § 300gg-91(a)(1), (b)(2). Thus the ACA covers both self-insured ERISA plans and insured individual and group plans.

In fact, however, the ACA does not apply to all health insurance coverage, and does not apply to all health insurance coverage to which it does apply to the same extent.  HIPAA excepted benefit plans, including specific disease and fixed-dollar indemnity plans, and short term individual coverage are not subject to ACA requirements, and many of the provisions of the ACA that apply to individual and small group plans, including the essential benefit package, the risk adjustment program, and the risk pooling, community rating, minimum medical loss ratio, and unreasonable premium increase justification requirements do not apply to self-insured plans.  It is, therefore, important to read the ACA section by section to determine which requirements or prohibitions apply to which types of health insurance.

One particularly important provision that has not received enough attention is section 9010, “Imposition of Annual Fee on Health Insurance Providers” (at 811-815 in the link).   This provision is found in Title IX of the ACA, but was amended both by the December 2009 Managers’ Amendment, which became Title X, and by the Health Care and Education Reconciliation Act, enacted in March 2010.  Section 9010 imposes a fee, beginning in 2014, on a “covered entity’s net premiums written with respect to health insurance for any United States health risk.” The fee is determined by multiplying the fraction determined by dividing the covered entity’s net premiums by the net premiums of all covered entities that are taken into account under the statute times a set annual amount, which begins at $8 billion, but rises to $14.3 billion by 2018.  This fee will be an important revenue source for funding the ACA’s coverage expansions.

The fee imposed by section 9010 does not apply to all insurers equally.  Insurers with annual net premiums of $50 million are fully taxed on their revenues, while insurers with annual net premiums of $25 to $50 million are taxed on only half of their net premium revenues, and insurers with net premiums below $25 million are not taxed at all.  Certain tax-exempt insurers are also taxed on only half of their net premium revenues (after applying the small insurer discount just mentioned).

The fee also only applies to “covered entities.”  Section 9010(c) defines “covered entity” as an entity that “provides health insurance for any United States health risk,” subject to a number of exclusions.  These exclusions include “any employer to the extent that such employer self-insures its employees’ health risks;” government entities; certain non-profit insurers that derive 80% of their revenue from government programs; and VEBAs that are tax exempt under I.R.C. § 501(c)(9).What is the universe of “covered entities,” however, that remain subject to § 9010 after these exclusions are applied?

To answer this question it is necessary to parse the meaning of “health insurance” and “United States health risk.”  Both terms are defined in the section, but only in part.  “United States health risk” is defined to include the health risk of an individual who is a United States citizen, resident, or located in the United States. § 9010(d).  “Health insurance” is defined to exclude certain but not all forms or HIPAA excepted benefits (as defined in I.R.C. § 9832(c)), long-term care insurance, and Medicare supplemental insurance.  Nowhere in § 9010, or indeed anywhere in the Internal Revenue Code, however, are the terms “health insurance” or “health risk” defined.  Section 9010 tells us what “health insurance” is not, but not what it is.

The most interesting question is whether health insurance for a United States health risk includes stop-loss coverage.  The sale of stop-loss coverage to small employer groups is increasing very rapidly.  As noted above, self-insured small groups are not subject to many of the consumer and market protections that the ACA applies to insured small groups.  Self-insured group plans are also not subject to state regulation because of ERISA preemption.  There is thus a great deal of interest in the part of small group plans in self-insuring.  Small groups can only self-insure, however, if they can find generous stop-loss coverage that will assume most of the health risk of employees.  A small employer that fully assumed coverage for its employees without stop-loss coverage would face unacceptable risk.  Some insurers, therefore, are actively marketing stop-loss coverage, often with very low attachment points, to small groups.

Is this stop-loss coverage subject to section 9010?  It certainly is “insurance” and it certainly covers a “health risk.”   It also does not fit within any of the explicit exclusions from the term “health insurance.”  But is “stop-loss insurance” “health insurance”?  The term “health insurance” is nowhere defined in the Internal Revenue Code (which would be the relevant code since the fee is administered by the Secretary of the Treasury and the fee is considered to be an excise tax, see § 9010(f),(h)(1)).  “Health insurance coverage” and “Health insurance issuer” are defined in § 9832, but those are not the terms used in section 9010, presumably intentionally.  By analogy, the term “group health plan” is used throughout the ACA to mean an ERISA plan, but in § 1301(b) the term “health plan” is explicitly defined to not include self-insured ERISA group plans.  Wherever the term “health plan” is used in the ACA without the adjective “group,” therefore, it does not include self-insured ERISA plans, but where it appears with the adjective “group” self-insured plans are included.  Similarly, it must be presumed that Congress used the term “health insurance” to mean something different from the defined terms “health insurance coverage” or “health insurance issuer,” which terms are used throughout the ACA in different contexts.

Is stop-loss insurance that covers health care risks health insurance?  This is certainly a reasonable interpretation of the term.  Moreover, the fact that Congress explicitly excluded from the definition of “covered entity” risk borne by employers in self-insured plans, but not risk that they pass on to stop-loss insurers, indicates that Congress did not intend to exempt stop-loss plans from the fee.

Applying the fee to stop-loss coverage would help to level the playing field between conventional health insurers and health insurers that insure health risk through stop-loss plans, and might help stem the flood of small groups to self-insured status, which in turn threatens to undo the consumer protections extended to employees insured through small groups and the market protections built into the ACA to stabilize the small group market (such as the risk adjustment and risk pooling requirements).

Section 9010(c) tasks the Secretary of the Treasury with providing implementing regulations and guidance.  It is to be hoped that the Secretary will clarify through the regulatory process that the § 9010 fee applies not only to conventional insurance, but also to stop-loss insurance.  Stop-loss insurance increasingly serves as an alternative mechanism for covering the same health risks that are covered by conventional insurance, while at the same time providing a means of evading ACA consumer and market protections.  Section 9010 should be applied to stop-loss insurance just as it is to conventional insurance.

Why Reduce Health Care Costs?

One rare point of elite consensus is that the US needs to reduce health care costs. Frightening graphs expose America as a spendthrift outlier. Before he decamped to Citigroup, the President’s OMB director warned about how important it was to “bend the cost curve.” The President’s opponents are even more passionate about austerity.

Journalists and academics support that political consensus. Andrew Sullivan calls health spending a “giant suck from the rest of the working economy.” Gregg Bloche estimates that “the 30% of health care spending that’s wasted on worthless care” is “about the price of the $700 billion mortgage bailout, squandered every year.” He calls rising health spending an “existential challenge,” menacing other “national priorities.” Perhaps inspired by Children of the Corn, George Mason economist Robin Hanson compares modern medicine to a voracious brat:

King Solomon famously threatened to cut a disputed baby in half, to expose the fake mother who would permit such a thing. The debate over medicine today is like that baby, but with disputants who won’t fall for Solomon’s trick. The left says markets won’t ensure everyone gets enough of the precious medical baby. The right says governments produce a much inferior baby. I say: cut the baby in half, dollar-wise, and throw half away! Our “precious” medical baby is in fact a vast monster filling our great temple, whose feeding starves our people and future. Half a monster is plenty.

But when you scratch the surface of these sentiments, you have to wonder: is the overall level of health care spending really the most important threat facing the country? Is it one of the most important threats? There are many ways to raise revenue to pay for rising health costs. Aspects of the Affordable Care Act, like ACOs and pilot projects, are designed to help root out unnecessary care.

I am happy to join the crusade against waste. But why focus on total health spending as particularly egregious or worrisome? Let’s explore some of the usual rationales.

Terrible Tax Expenditures and Suspect Subsidies?

Employment-based insurance gets favorable tax treatment, and much Medicare and Medicaid spending is drawn from general revenues. So, the story goes, medicine’s big spenders don’t have enough “skin in the game.” Once health and wealth are traded off at the personal level (as the Harvard Business School’s Clayton Christensen advocates), people will be much less likely to demand so much care. Government can attend to other national priorities, or individuals will enjoy higher incomes and will be free to spend more.

I respect these arguments to a point, but I worry they partake of the “nirvana fallacy.” If I could be certain that leviathan would repurpose all those wasted health care dollars on infrastructure, or green energy, or smart defense, or healthier agriculture, I’d be ready to end tax-advantaged health insurance in an instant. But I find it hard to imagine Washington going in any of these directions presently.

Giving tax dollars back to taxpayers also sounds great, until one processes exactly how unequal our income distribution is. In 2004, “the top 0.1% — that’s one-tenth of one percent — had more combined pre-tax income than the poorest 120 million people.” To the extent health-related taxes are cut, very wealthy households may see millions per year in income gains; the median household might enjoy thousands of dollars per year. Sure, middle income families will find important uses for those funds (other than bidding up the price of housing and education). But at what price? What if the insurance systems start collapsing without subsidies, and more physicians (who are already expressing a desire to work less) start seeking out pure cash practices? A few interactions with the the very wealthy may be far more lucrative than dozens of ordinary appointments.

Consider the math: billing a $20,000 retainer from each of 50 millionaires annually may be a lot more attractive to physicians than trying to wrangle up 500 patients paying $2000 each—or, worse, getting the money from their insurers. There are about 10 million millionaires in the US; that’s a lot of buying power. One $10,000 score by a cosmetic dentist from such a client could be worth 400 visits from Medicaid patients seeking diagnostic procedures. Providers are voting with their feet, and a Medicaid card is already on its way to becoming a “useless piece of plastic” for many patients. Given those trends, simply reducing health care “purchasing power” generally risks some very troubling outcomes for the very people the health care cost cutters claim to protect. No one should welcome a health care plutonomy, where the richest 5% consume 35% of services, regardless of how sick they are.

Is Anyone Underpaid in Health Care?

Health commentators rightly draw attention to big insurer CEO paydays. Top layers of management at hospitals and pharma firms are also getting scrutiny. Wonks are up in arms about specialist pay. Read more

Ten Million Dollars Per Week

Last year I posted both here and on Balkinization on the not-progressive-enough surcharge on top earners to help subsidize the health care coverage of the uninsured. Some critics contended that the recession would make the very well off so much worse off that concerns about inequality were outdated. Unfortunately, the trend toward more inequality has instead continued and those numbers, along with extraordinary updates, are worth considering again. Last year, I wrote:

Read more

Disparate Impact and the Tanning Tax

I have previously blogged in favor of a vanity tax, so I was happy to see the health reform legislation included a 10% tax on tanning salons. But not everyone is so pleased to see it:

When an article about the fallout from the tax — which took effect last week — appeared on the Washington Post’s Web site Wednesday, dozens of commenters questioned the tax’s legality. The case can seem deceptively simple: Since patrons of tanning salons are almost exclusively white, the tax will be almost entirely paid by white people and, therefore, violates their constitutional right to equal protection under the law.

Randall Kennedy dismisses that claim out of hand. But I hope the angry tanners join me in endorsing a plan to address the grave injustice here: legal scrutiny of face-whitening creams. Tax tanning, tax lightening, and we may well move closer to a society that can transcend the fickle “beauty bias.”

Survivors’ Costs Gone Wild, Beverage Tax Edition

Mr. Gradgrind Catches Louisa and Tom at the Circus. Illustration by Charles S. Reinhart (1844-1896)

Gradgrind is alive and well, as this exchange on soda taxes explains:

This discussion between Greg Mankiw and David Leonhardt reads a bit like an economics textbook gone rogue. At issue is whether a soda tax makes sense. David Leonhardt says it does: There’s good evidence that it will reduce obesity, which will reduce health-care costs. Au contraire, says Mankiw: You have to “net out the appropriate budgetary savings from shorter lifespans.” In other words, maybe it’s not worth it, as the obese live shorter lives and so cost the government less.

Ezra Klein goes on to describe how the calculation of survivors’ costs (without offsetting valuation of survival benefits) “disadvantages the quality/value agenda as compared with the cost-control agenda.”

I would add a couple more points to complicate the analysis:

First, Mankiw may be interested in exploring the benefits of the “plus-size” clothing market. As the NYT reports, “The plus-size market increased 1.4 percent while overall women’s apparel declined 0.8 percent in the 12 months leading up to April 2010 versus the same period a year earlier, the most recent figures available, according to NPD Group, a market research firm.” Certainly taxes that discourage the development of this growth industry should be scrutinized carefully.

Second, for team Leonhardt, we might think of the tax as a way of deterring anti-beverage tax ads which have glutted the tri-state airways over the past few months. We could all do with a little less of the rent-seeking featured below: